The Cost of Share Dilution
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- เผยแพร่เมื่อ 30 พ.ค. 2019
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Share dilution refers to when a company issues more shares in addition to what's already outstanding, and even though you might not notice a change in the value of your share, it does have a material impact on your holdings. Some share issuances do eventually benefit the investor, others however can be very costly. So let's talk about share dilution it what it means for you, the investor.
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DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.
Happy Friday everyone! What are your thoughts on share dilution? Are you willing to give management the benefit of the doubt, or do you stay away from rising share counts?
I've noticed looking into REIT's among other securities that many of them issue more shares over the years contributing to lowering values, another factor regarding starting or closing positions.
Thanks for posting another great video!
Just when is it beneficial to go secondary issues to raise capital vs debt. Is it is good to issue when management thinks shares are overvalued ?
Hi. Could you explain how stock splits would relate to this? Do they add or extract value? Perhaps in a video. Thanks
@@felixrodrigues1157 As far as I know they don't do anything to total valuation hence no dilution. They make stocks in a tradeable range for retail traders to participate.
Can you discuss how exec share issuance and share buybacks all cancel each other and at the end the execs and board of directors just end up richer - what can be done to stop this?
Usually, when I find a small TH-cam channel and think to myself that it's vastly underrated, it ends up being a big TH-cam channel a few months later.
if only we could invest in youtube channels lol
Frieza 223 great idea
@@frieza2235 that would be genius
Subscribed. Everyone should.
You weren’t wrong
Great video! You should do a mini-series on “how to spot bad corporate behavior” and another on “how to spot good corporate behavior”... Kanye another on debt/bonds?? just an idea. Again, great video!
This is just like how printing more paper money reduces the buying power of your current personal savings. Basically more paper money in circulation means less value each paper money (aka bank note) holds which is basically inflation. Share dilution is basically inflation that reduces the corporate value of your shares.
David Lam imagine that! Inflation destroys value. Who would have thought?
That is a pretty comprehensive way of summarising it.
Thanks ❤
This was really a great context to the share dilution concept. Thanks
lol tell that to the modern economist. Its not reducing purchasing power, its power to the people :D
@@simonl4657 Earlier you used to carry Say 10 units of currency to buy x goods. Now you carry 20 units to buy same x goods. In what universe it is power to people?
You missed 2 (if not more) very important parts! Who decides to issue more shares? Don't the shareholders have a say in this? And what notice does "the company" have to give? Are shareholders able to sell their stock before new shares are created?
I have some limited experience in this. They issue a statement and it happens. That's it. Then stock price goes down.
There's no say in it. Perhaps the board of the company votes on it.
@@humanman usually high percentage owners get to vote
Here in Germany, the shareholders decide on it. They take a vote.
I've always wished this system were designed so that a company going public defined only then how many shares exist. They could split the stock, but they couldn't sell a second time existing investor equity.
exactly
Companies would issue more debt to compensate
I get what your saying but from the companies point of view, splitting the stock does not achieve the goal of getting more capital for whatever they are planning to use it for.
people is capital!! split the stock
The way that you make these videos is refreshing and calming, there is something just so right about them.
I love the white background, i love the simple clothing, i love the simple editing. It is efficient and elegant.
Thank you for this. This format of filming and editing is the most visually pleasing I have seen on TH-cam.
This is maybe the most useful video for beginning investors I have seen on your channel so far. Sometimes trying to find "good picks" is not so simple. This video gives another way to judge a company's prospects!
I'm studying for the CFA Level 1 exam and this video gave me a new perspective on EPS and diluted EPS. Thanks! :)
Video topic idea: Discuss closed end funds vs open end funds and how a premium or discount of the the Net Asset Value (NAV) relates to the pricing.
Not only are the explanations clear with examples but the animations are on point. Extremely well made video!
Awesome video!
Clear and straight to the point.
Bravo! 👍🏻
you have a great speaking voice. this video set a lot of facts straight for me; thank you
Your chanel is actually really cool, glad I discovered it!
He is the best market teacher actually
I love how you explain things so clearly
Thank you for creating this channel! One of the few proper investing channels out there. NO PUMP AND DUMP NFT GOLD TEETH JETS BS
Loving how deep you’re diving into the details with all this. So much to know and learn! Wondering if you could maybe talk sometime about what it means for an index fund to be “hedged to the Canadian dollar”? E.g. there are two etfs covering the total us stock market, identical but for one is cad-hedged and the other isn’t. Why would someone choose one over the other?
Best video I have seen on the topic. Thank you very much, you have a new subscriber!
Thanks love these videos. they help alot
Great video, super clear and easy to understand. Congrats!
Awesome 'Dilution Tutorial' with nice and relevant examples! Thank you for sharing knowledge.
Very helpful info explaining clearly this topic that has always been somewhat of a mystery to me. Thank you!
Love the videos. You should have mentioned buybacks usually have positive tax effects as compared with dividends.
Very well explained. Thank you :)
Wow this video taught me a lot more than just share dilution.
This was a very thorough and informative video. I appreciate it!!!!
This is so great!! Thank you!!! Will you make a video on how long term bond rate moves and why?
Example #1 for questionable share dilution: Tesla this past quarter. That was a capital raise to just keep the lights on for the year. I hope they can turn things around for all investor's sakes, but I am not touching that one. Also, to be fair, only about 1/4 of that raise was actual stock issuance, most was debt.
Well it looks pretty good now.
lol. do not worry about Tesla. It will be the Apple of the 2030s.
But you hate yourself now lol. $1200 as I write this comment
@@JD-yx7be $2050 now...
@@kaushalmaganti8839 $880 post-split😂
Hi there just came across the channel and loving the simple to understand format and presentation. Can you do a video on quantitative easing please. It's v similar to stock dilution and a lot of people need to understand that it is destroying their purchasing power ultimately
I have been wondering about this for ages but never knew what to google!
Thank you for another very educational video!
Beautifully explained. Very enjoyable
I enjoyed this video. Very easy to understand.
Excellent video Richard!
Thank you!!! Great video, it makes much more sense to me now :-)
Very helpful video! Thanks so much!
Great video as always!!
Well explained! Thank you!
Thanks for the video!
Clear and detailed explanation. Gracias
Thanks for this helpful video!
Helpful video. Can you also do videos on 'foreign excgage hedging' and 'interest rate hedging'? I find those concepts a bit tricky.
Just what I needed! I own some IEP
Thank you buddy great video
Explained pretty good. Thanku!
Thanks for this very important video. It's very frustrating when management uses the share dilution ineffectively with poor, wasteful and ineffective approaches.
Just to pick your brains. If a Company Secretary steps down and a new one comes up is this a potentially bad sign? Shares tanked after this happened. Looking forward to your helpful advice. Thank you very much once again!
Well done! Thank you.
Great lecture. Thanks
Thank you very good explanation.
This channel is amazing.
Thank you!
Best channel on TH-cam
Very very helpful thank you
Should take about anti-dilution clause.
Also expand on whether the capital raise is in series A, B, C or D etc..
great information , thank you
That was helpful
great video! although i think you are oversimplifying to make a point (which makes sense to keep it simple) but so many companies have done massive buybacks in 2018-19 only to see their share prices continue to sink, while Canopy Growth $CGC your example the stock has actually gone up 10x since 2016. also never heard of wallmine so i will check it out, thanks for sharing!
Great video!
Thanks
I’ve been wondering what share buyback is
Thanks a lot
Well said
Very informative
can you do a video on share buybacks?
more precisely: when is it legitimately sound business practice and when is it just a CEO trying to boost the value of his compensation shares?
nice explanation
Great Video and easy explanations for the everyday Joe. Thanks!
This channel needs more subs!
Great video..
amazing video but can you also make a video on important of lawyers while sign contracts with vc's or other investors with examples
Good work! Your presentation was solid ! Keep it up :)
How are we, as investors, going to know if the company is going to issue shares or how the money raised from the new issues is going to be used? Do we need insiders in the company? Are there announcements to investors?
You won't know it ahead of time, but when a public company decides to issue new shares, it'll be public information, and you can see their cash flow statement to see how that money is being used
Nice video.
I wonder if companies would be deliberately using share dilution as a way to break away from shareholders' hold on their business, due to internal conflicts of interests?
This sounds a lot like the plot of the Social Network
@@killakam_0923 Really? I watched the film a few years ago, but never understood it this way. Maybe I should have a rewatch... :)
sounds like a move to buy the stock after the price has adjusted to the dilution and before the potential increase in profits
When Occidental Petroleum acquired Anadarko, Oxy gave Berkshire Hathaway some preferred shares which will dilute our position. We're hoping that the move becomes profitable. We're hoping that Oxy and Berkshire have done their homework and will make us some money eventually.
DRP/DRIP dividend reinvestment is another scenario where companies often issue new shares (and keep the cash)
Please talk about Share Rights! They're super rare and I had no info on what to do or why when it happened to me with ACP recently
does the dilution come from the outstanding shares or can you just "print" new shares?
Sorry i don't know anything about stocks but i've been watching your videos and they are really helpful but i still dont know the difference between EPS and dividens?
This sounds anlagous to inflation with shares functioning as currency. If everyone has shares in the company, the shares become effectively worthless. And if you increase the number of shares without growing wealth, the shares become less valuable than they were before.
How can one know that the company is going to issue new shares ?
Is it required to inform shareholders in advance ?
Or are we being screwed first and then informed about it.
Thanks, nice video.
Companies usually make announcements. Shareholders are encouraged to follow these on a regular basis to manage their investments more effectively.
@@nachannachle2706 Thanks.
It should be mandatory.
good video
Love the video. For me the video raised more questions than it answered (in a good way). In short I don't think I understand what a share is. When a company is founded who owns the company? I thought the founders own the company, but your description of how new shares are issued leads me to believe that the company owns the company. When a buyback occurs who is buying back the shares? Do share issuances and buybacks "hurt" and "help" all share holders equally?
If PBC has 100 shares 70 owned by you R, and 30 by me V, and 100 new shares are issued, then the value of our shares has both halved, but effectively you lost a lot more since your ownership fell from 70% to 35% while my ownership fell from 30% to 15%.
Does this mean that larger investors will be more resistant to share issuances? Is it possible to split everyones shares before issuing new shares in order to mitigate this problem? e.g. first split the 100 shares to 200, then issue 100 more shares leaving you with 140 of 300 shares, and me with 60 of 300 shares?
Thanks!
Your math is mixed up in the second and third paragraphs. The owner of the larger portion will always lose more dollars with any percentage decrease, just as they will always gain more with any percentage increase. If you own $10 of stock and it goes up by 20%, you make $2. If I own $100 of the same stock, I make $20 when it goes up by 20%. The dollar gains and losses are functions of the amount of money you have invested; the percentage loss (in the case where the amount of stock doubles and our ownership is cut in half) only costs the larger holder more because they have more invested. The inverse occurs when the stock goes up in value (for whatever reason).
Regarding paragraph 3; splitting shares has no impact on this exercise. If you split the shares, meaning there are now 200 outstanding, then issue 100 new shares, you are issuing only 50% of the comparable amount as in the first example (issuing an amount of new shares equal to 50% of the original outstanding amount, as opposed to equal to 100% of the original outstanding amount). This would be identical to what would occur if you did not split (maintaining 100 shares), then issued only 50 new shares.
"Shareholders" own all corporations, regardless of how many owners there are, who founded the company, or whether the company is publicly traded ("publicly traded" meaning you can buy shares on a stock exchange; the opposite is "privately held", meaning you cannot buy shares via any public market).
Whoever put up the initial money to start a company ("founders" and anyone who invested in them) did initially own the entire company. However, as companies grow, they often sell off parts of ownership; this is typically done to raise money to continue to grow and improve the company (although is also sometimes done to simply convert ownership into cash). Mark Zuckerberg (and his friends) owned 100% of Facebook when it was founded. Now, he owns a significantly smaller portion of the company; he sold portions of his ownership.
This video is most relevant to publicly traded companies; these companies can have shareholders of all types (founders, employees, executives, other companies, mutual funds, random people around the world, etc.). All of the shareholders are represented by the company's Board of Directors; the Directors have a fiduciary responsibility to do what they see as best for the shareholders. So, in a case where the Board decides to issue new shares, they do so because they believe it will add value to the company, and therefore to the company's owners (the shareholders). There can be different classes of shares, but typically share dilution would impact each share equally. So, the effect it has would be equivalent for each of your shares and each of my shares. If I own 10 times as many shares, I might feel a greater impact. But that is only because I have invested more of my money into the company.
whats the difference between share dilution and a stock split?
in a dilution how does ownership of the created shares work? 100% of the shares created go to the business or do top execs get to pocket some?
Do you think the later of your video is what CCL has done this week?
Share dilution is not always bad, even though there are better methods (like secondary stocks for specific growth aspects, like google did). If the company sells shares, the company puts that money onto its books, which gives it cash flow, which ultimately doesn't hypothetically change the value of the company.....if that money is used specifically for growth and not just to line the pockets of executives, then the value of the company can only go up and hypothetically the price of the stock should also go up (depending on how the shares were "dumped" it could be between a week and a few months before you see a change for positive).
For example, if I have a lemonade stand and sold stock at $1 per share at a 100 stock open while keeping 150 shares to myself, then buying up all 100 shares will put $100 into the company coffers (making the company value $100 out of 250 shares is VPS of $0.40). Let's say that it costs $200 for an automatic lemonade squeezer, so I issue another 200 shares, keeping 100 for myself, in order to raise the company cash flow to $200.....I then purchase the device, which is now inventoried as company asset, making the companies "value" now worth $200 out of 450 shares, which is a VPS of $0.44. Even though I gave myself "free" shares in order to keep more than 50% ownership in the company, the valuation of the company improved slightly. If it causes the business to double its earnings, then the device adds more than its cost in valuation to the company.
Yes, there are companies that use this process to scam shareholders, so OBVIOUSLY it takes a little bit of reading to make sure that these types of dilution actions are not used maliciously.
In the case of a share issuance (to increase CEO stake in the firm) in lieu of forfeiting certain IP rights & royalties held by the CEO/Founder, there is no visible cash injection to run the business. What does mean to the cost of equity ? Goes up or down?
Dilution does not decrease your ownership in the company. However, it does decrease the value of the share. Supply and Demand principle. The total shares is not determined by the outstanding shares, rather the authorized shares.
Sounds like the inflation tax...
Is there any place we can check if the companies are diluting their stocks?
yes amazon is just an outlier
It seems to me that public BDCs and REITs work a bit differently than described here, since they can’t retain earnings and they are typically already levered up into a target ratio range already there’s no real room to grow without fresh shares being sold. Can you maybe talk about how to judge public BDCs and REITs better.
is it the same with class A share?
OTC , Pink Sheets do this increase volume since they have in most cases 13B shares O/S .
If they buy back the stock and retire it...does that mean that the eps will do better because there are less shares used in the equation?
buybacks are not necesserily good tho.. especially if done right after executives execute their stock options.. In that way the company is paying a high price for their own stock, and selling it at a low price. So, in this case, only the excutives win. A more interesting strategy would be paying dividends for its shareholders for a long and continuous period of time (since they are the true owners of the companies, and not the excutives)
So should I sell before the company I’m investing in dilutes its shares?
Is there some limmits or maximums for company to issue new shares?
Buy backs are better than dividends, because you don’t pay tax until you sell...
Sub scribed! Oh!
Surely this has to be one of the main reason a company actually cares about its share price
So essentially it's having everyone sell off a percentage of their stocks to raise capital.